Regulation Against Global Warming in an Unequal World

Sylvestre Gaudin Hultberg

The Issue : Global Warming: Evidence:

Earth 1°F warmer than 100 years ago 4 warmest years of 20th century in the 90’s Temperature anticipated to increase 2-6 °F

more in next 100 years Small change in climate makes a big

difference Scientists agree on the source of Global

Warming: Greenhouse Gases (GHG) and reduced carbon sequestration – All human induced

Greenhouse Gases Carbon Dioxide Methane Nitrous oxide CFC synthetics Ozone Water vapor 81.40%

9.90%

6.50%

2.20% CO2

CH4

NO2

HFCs, PFCs,and SF6

Sources of Increased GHG Concentrations Industrial: 77%

Developing Countries produce less than 1/3 of industrial CO2, 1/5 excluding China

Land use changes: 25% Developing Countries are virtually

responsible for this type of GHG emission Combined effect of reducing sequestration

Per Capita Emissions: Per capita emissions in the US =

Twice the per capita emissions in Europe 19 times the per capita emissions in Africa 23 times the per capita emissions in India

US emits 25% of total GHGs But the world is changing…

Share of LDCs is increasing rapidly

How Much Do We Know? Effect of global warming could be

Catastrophic Mild or even positive

Do we want to run the risk? Do we care about future generations? How much do we care about today? How valuable is what we would give

up? Who is “we”?

To reduce the risk we need to:

Reduce human induced GHG emissions on a global scale

Protect and/or restore carbon “sinks”

But how? Economists like to use markets to

restore price incentives

The Economics of Global Warming

Global negative externality: When emitting GHG, polluters do not take

account of the cost of their actions on Society – We need to put a price on the pollution!

Graphical analysis with electricity producers: Fossil fuel producers produce too much Alternative Fuels producers produce too little In a world of certainty, we can internalize the

costs: less “dirty” electricity and more “clean” electricity

Market Based Mechanisms A tax per unit of GHG emission:

Optimal Pigouvian Tax: Tax = MEC Producers face MSC and produce Qe Producers abate until MCA=MBA (the tax)

Distribution of tradable permits Optimal quantity is set so that Qe is

produced Firms have different costs of abatement Costs of achieving the target are minimized Price of the permits = MEC

The worse kind of Externality

Intertemporal Future generations are affected

Global The whole world is affected

Uncertain Both costs and benefits are highly uncertain

Taxes Versus Permits

Equivalent in a world of certainty

But costs and benefits of abatement are highly uncertain

Taxes Vs Permits Under Uncertainty Taxes fix price and

allow firms to adjust abatement so that MCA=MBA. The level of pollution cannot be controlled Risk is imposed on

the environment

Permits fix the emission target and allow price of GHG emissions to vary. The price of permits cannot be controlled Risk is imposed on

the regulated firms

Which approach seems preferable if we think that the

environmental risk is high because of potential

catastrophic consequences?

Which approach seems preferable if we live in a

developing country and present consequences on costs and

production may be catastrophic ?

Discount rate issue

Choices Made in Kyoto, 12/97 Parties of the UNFCCC:

Annex I countries: Industrialized countries plus Transition economies

LDCs not in Annex I

Set Emission target for Annex I countries:

Chosen rule for distribution: grand-fathering On average 5.2% less than 1990 emission levels –

First budget period 2008-2012 – 6 GHG included Carbon sequestration activities offset emissions

Market Mechanisms to Achieve the Targets

IET – International Emissions trading Participating Annex I countries only

JI – Joint Implementation mechanism Participating Annex I countries/firms only

CDM – Clean Development Mechanism Annex I countries/firms with projects in

LDCs

Permits

Allowances in ERUs (Emission Reduction Units)

Credits from JI or CDM projects in CERs (Certified Emission Reductions)

Different prices for ERUs and CERs Carbon sequestration activities increase

allowances: CTO (Certified Tradable Offsets)

Equity Considerations North North Trade

The “French” view (Ministry of Equipment)

Efficiency is attained with tradable permits but

benefits USA with highest emission per head and per $ GDP

penalizes France who has significantly lower rates of emission

Transition Economies

Equity Considerations North-South Trade

View that a per-capita allocation of GHG allowances would be more equitable

Understanding that share of non-industrialized countries in costs is close to zero – could be a net gain -> equitable

LDCs cannot participate in selling CERs even if they contribute (incentive to join)

Poorest countries cannot afford to join – limits to growth.

Equity Considerations – N/S Different stage of development

Different preferences Different marginal utility of income Different personal discount rates Different experiences with markets On the rising part of the Environmental Kuznets

curve Value of ERUs will impact the value of the CERs Other issues: Transaction costs? Market power?

Equity Considerations S/S What countries will first benefit

Countries with high reduction potential Countries with pre-existing FDI regulation Countries with least transaction costs and

best monitoring Poorest countries score badly…

Corruption?

The future Participation of developing countries is essential

Need to control at least 55% of all emissions Need a closed market to avoid leakages and free riding

Moving later to per-capita targets could increase equity both N/N and N/S and encourage LDCs participation

Enforcement clauses need to be strengthened Monitoring and accounting needs to be improved The CEM offers opportunity to lead LDCs onto a

sustainable development path.